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Vol. 72/No. 42      October 27, 2008

 
Bailouts fail to halt
capitalist world crisis
(front page)
 
BY BRIAN WILLIAMS  
Hoping to crack the grip of a credit freeze that has toppled some of the largest banks and financial institutions, U.S. government officials announced October 14 that they will immediately begin injecting $250 billion of the $700 billion bailout package directly into the banks prior to purchasing “distressed” assets.

Chief executives of the nine largest U.S. banks were called to the Treasury Department offices in Washington, D.C., where they agreed to the measures.

According to the New York Times, in response “the flow of credit, which has been choked for weeks, began to trickle through the financial system.” But the latest scheme does nothing to solve the underlying causes of the capitalist crisis, including the bursting of the housing bubble and the resulting collapse of the financial instruments based on it.

Under the new plan, the banks will sell preferred stock to the government along with the option to purchase some common stock. In addition, according to the Times, Washington will be able to appoint directors if a company misses six quarters of dividends.

The largest banks—J.P. Morgan Chase, Citigroup, and Bank of America—will each get $25 billion in hopes that they will again start lending the money. A similar approach is being taken by London with $63 billion being given to the Royal Bank of Scotland, Lloyds TSB and HBOS; by the German rulers with a $675 billion bailout; and in Spain with $135 billion.

The U.S. rulers over the past several weeks had failed to reverse the virtual shutting down of credit; banks are not loaning to each other and companies have been unable to secure short-term loans. Among the measures they took were an emergency Federal Reserve cut in interest rates to the banks from 2 percent to 1.5 percent; insuring deposits up to $250,000 during the next year, an increase from the previous $100,000 limit; an $85 billion bailout to insurance giant American International Group, followed with an additional $37.8 billion tacked on three weeks later; and the $700 billion bailout package.

Capitalist governments in the United States and other imperialist countries in Europe hope that by pouring billions into the banks they can loosen the worldwide credit freeze that over time threatens production, trade, and the entire economic functioning of the capitalist system.  
 
Instability
The instability of the world capitalist system was highlighted as stock markets rose sharply October 13 after having plummeted the previous week, and then plummeted again on October 15, dropping 733 points.

While the Dow Jones Industrial Average went up 11 percent October 13, the largest one-day gain since 1933, it remained 34 percent down from its October 2007 high point. The October 15 drop brings the Dow down to 8,577 points.

The previous week stock markets plummeted around the world. The Dow Jones Industrial Average declined 18 percent—the worst one-week decline in its 112-year history. Since the beginning of the year U.S. stock prices are down 36 percent.

The FTSE-100 stock index in the United Kingdom fell 21 percent that week. In Japan the Nikkei 225 was down 24 percent.

In Russia, the stock market dropped 61 percent over the past three months, wiping out about $1 trillion in value. Authorities shut the exchange there for several days. Accelerating the crisis is the drop in the price of oil, gas, metals, and other natural resources, which are the bedrock of Russia’s economy.

In Iceland, the government took control of the country’s three major banks as the government hovered on the brink of bankruptcy. The banks’ debts were equal to 10 times Iceland’s Gross National Product. Deposits from foreign investors are essentially wiped out, as the government will only guarantee domestic deposits. In response, the British government froze assets of Icelandic banks in the United Kingdom and threatened to use antiterrorist legislation to take over assets of other Icelandic companies in Britain, reported the New York Times.

In an October 12 article in the New York Daily News, Democratic presidential candidate Barack Obama made clear that, if elected, he will implement deep cuts. “I’ll go through the entire federal budget and eliminate programs that don’t work and aren’t needed,” he wrote. “We will all need to sacrifice … we are all in this together.”

Republican presidential candidate John McCain says he will “create jobs for Americans in the most effective way a president can do this—with tax cuts.” Both McCain and Obama voted for the $700 billion bank bailout law.

The financial crisis is aggravating the declining sales in the auto industry. Sales of new vehicles dropped in September to levels not seen in almost 20 years. Sales at Ford fell 34.5 percent compared to September 2007; Chrysler, 32.8 percent; Toyota, 32.3 percent; and GM, 15.6 percent. “JD Power and Associates reported that the global auto industry may experience an ‘outright collapse’ in 2009,” said the Washington Post. Seeking to avert bankruptcy, GM is currently negotiating with Chrysler over a possible merger. GM stocks have plunged 89 percent over the past year to below $5 as of October 10, its lowest level since 1950. Ford stock was selling October 9 for just $2.08.

Pension funds that are invested in the stock market, have declined sharply, threatening the retirement of many workers. In the past 15 months, about $2 trillion of pension funds and 401 (k) investments have been lost, according to Peter Orszag, director of the Congressional Budget Office.

The impact on industry is just at the beginning. PepsiCo, the soft drink manufacturer, said it plans to close six plants and eliminate 3,300 jobs.
 
 
Related articles:
Capitalist crisis and rising unemployment  
 
 
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